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4 Top-Ranked Undervalued Sector ETFs to Buy in 2019

Sanghamitra Saha
IBM's Q2 results put these ETFs in focus.

The final month of the year brought no joy for Wall Street with the S&P 500 losing 10.9% on renewed global growth worries, Fed’s policy tightening and the government shutdown. Though markets saw the biggest single-day jump on Boxing Day since 2009, most of the dissuading factors are still in place (read: Alternative ETFs See Solid Volume: Are Investors Still Shaky?).

Meanwhile, the market bloodbath made equities become almost “historically cheap”. According to a model by Yardeni Research Inc., “the S&P 500’s forward price-earnings ratio came out to 0.85 times the rate at which analysts expect profits to rise over the next five years.”

Signs of a Comeback in 2019?

Though the Fed remained super hawkish in 2018, having hiked key rates four times, the number of possible hikes halved to two in 2019. Such dovishness may spur some equity rally. Also, most of the U.S.-China trade tensions have been accounted for in 2018’s equity valuation. With concerns being oversold this year, 2019 may not see huge selloffs due to trade war tensions.

Investors should note thatthe number of corporate executives and officers buying shares of their own companies has doubled in the past two months from the prior two. Insider buyers have surpassed sellers by the maximum margin since August 2011, per data compiled by The Washington Service. Strong insider buying shows that the company’s officials are optimistic about the stock.

At 13.6 times forecast earnings, the index is now trading at 9% discount to the average multiple since the bull market started in 2009 and insider buyers thus have started taking advantage of the low prices. After all, profits from S&P 500 companies are expected to rise to a record $173 a share next year (read: 3 ETFs to Benefit From 8-Year High Insider Buying).

Are There Any Undervalued Sector ETFs?

Overall, the investment backdrop is pretty mixed with perils and possibilities on either side.  Against this backdrop, it would be intriguing to highlight a few sector ETFs that have below-average P/E ratios.The below-mentioned ETFs have a P/E (36 months) less than that of the broader market ETF SPDR S&P 500 ETF (SPY) (16.29x) and a Zacks Rank #2 (Buy).

Fidelity MSCI Communication Services ETF (FCOM)

The fund is rich with some FAANG components which have been badly beaten down this year despite bullish fundamentals. The fund may bounce back in 2019 on cheaper valuation (read: Why to Buy the Dip in FAANG ETFs).

Rank #2

P/E: 8.21x

SPDR S&P Pharmaceuticals ETF (XPH)

Trump’s announcement of the drug plans in May was in the best interest of pharma companies. Drug plans put pressure on U.S. trading partners, forcing them to pay more for medicines. Though a split congress in midterms may put the sector’s fate in jeopardy, as of now, investors can benefit from the sector’s inherent strength (read: Midterms Produce Split Congress: ETF Areas in Focus).

Rank #2

P/E: 10.87x

First Trust Consumer Discretionary AlphaDEX ETF (FXD)

Shoppers splurged this Christmas despite a market slump, reflecting upbeat consumer sentiment (read: What Made Wall Street ETFs' Best Rally Since 2009 Possible?).

Rank #2

P/E: 11.37x

First Trust Utilities AlphaDEX ETF (FXU)

As many fear an inverted yield curve in 2019, rise in long-term bond yields would be in check in 2019, benefiting utility funds.

Rank #2

P/E: 11.79x

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FT-UTIL ALPHA (FXU): ETF Research Reports
 
FT-CONSUMR DIS (FXD): ETF Research Reports
 
SPDR-SP PHARMA (XPH): ETF Research Reports
 
FID-TELECOM (FCOM): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
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